Black Christmas II

In my book a 'Black Christmas' is when spending growth during the holiday shopping season is less then the rate of inflation. Back on July 11, I posted that a 'Black Christmas is a real possibility.' Consumer spending fell sharply in August:

On the consumer front, spending fell an unexpectedly steep 0.5 percent in August, the biggest drop since November 2001, the Commerce Department in a report on Friday ( Reuters 9/30/05)

Will consumer spending continue to fall through the end of the year? Will there be a 'Black Christmas'? A Black Christmas is looking likely now. The negative savings rate of July and August are not sustainable. Given the soaring home heating costs this winter coupled with the end of the housing bubble a Black Christmas is looking likely. An economic storm is brewing.

Bubble Terminology

Here are some of the bubble terminology: *UPDATED*

• Greenspeak
• HomeDebter
• Toxic Mortgage
• Speculative Fervor
• Creative financing
• Speculator
• Flipper
• Flipping
• Option Arm
• House Poor
• Houisnghead
• Bubblehead
• Bubble Cheerleader
• Negative Amortization
• Interest Only
• ARM = Adjustable Rate Mortgage
• Bubble Market
• Double Digit Appreciation
• Housing Bust
• Housing Boom
• Soft Landing
• Hard Landing
• Froth
• Asset Inflation
• Bidding War

What other terms am I missing related to the the housing bubble?

Rates on ARMs Continue to Rise

The chart shows that interest rates continue to rise on Adjustable Rate Mortgage (ARM) loans.

Credit is tightening. The bubble is under significant pressure on many fronts.

Consumer Spending, Housing & Recession

American's spending spree is unsustainable. It has been fueled by a credit bubble. The credit bubble is fueling both strong consumer spending and the housing bubble.

The personal savings rate is dangerously low. "Americans no longer stuff their savings under their mattresses. Instead, their homes have become the national piggy bank of choice. ( Investor's Business Daily Article )". According to the Federal Reserve Board the US "personal savings rate sank to -1.8% during the second quarter, meaning Americans used credit, asset sales or past savings to underwrite more purchases than their monthly income alone would allow. In contrast, the Japanese save about 7% of their disposable income while many Europeans sock away more than $10 for every $100 they earn, says the OECD ( IBD Article )."

What has caused this spending spree? The spending spree has been fueled by the credit bubble. The credit bubble has been fueled by extremely low short term interest rates ( 1% at one point) and a 'global savings glut'. The US has declared a war on savings and savers. Until recently, the interest rate banks were offering was not even keeping up with inflation. Remember when banks were offering .96% on one year CDs. Pathetic. After 9/11, one of the things President Bush told us was to go forth and shop. Shop till you drop.

But others wonder how long the consumer, who is already spending much - if not more —- of his disposable income every month, can keep up his buying pace.

Housing is the linchpin. If home price appreciation slows or flattens, homeowners will have less equity to tap for future borrowings.

A cooling housing market may also make consumers feel less certain real estate holdings will carry them through retirement, encouraging them to stash more at the bank.

With gasoline prices already nipping at disposable income, the thinking goes, extra savings may come at the expense of vacations, dining out, and other discretionary purchases. (IBD)

On October 17th the new bankruptcy laws go into effect. On top of that the new credit card repayment schedule takes effect. Next month, people who have held a credit card for some time should get a surprise: each month, they will have to pay 4 percent of the outstanding balance on the card, not 2 percent.

This move was dictated by the federal government's comptroller of the currency in 2003. The phase-in for new customers began in the summer, and October is the big month for existing customers. It's not small change. Almost 40 percent of credit-card holders pay only the minimum balance, according to Cardweb.com.

The average household credit-card balance is around $9000, according to Boston's Babson Capital. Previously, families paid a minimum of $180 a month. Now, they will have to pay $360 each month. ( San Diego Reader 9/22/05)

The very strong consumer spending and housing bubble are entirely unsustainable. So how long can this unsustainable situation continue? Not much. The party is almost over. The alcohol which was bought on credit is about to run out. Next year, America will be in for a nasty hangover. A recession is coming.

*********Please Note: this post was up early but the html was seriously messed up and was causing the blog to crash. I deleted the post and start again. Sorry to marinite and skytrekker who left insightful comments.*****

Lots of Useful Information at Bankrate.com

There is so much useful information available at Bankrate.com . They have wonderful charts showing interest rates on different types of loans. Not only this, but they have terrific down to earth articles. Try this article ' 3 borrowing misconceptions to avoid .' Below is an excerpt.

'Take money out of your home'

The idea of "taking money out of your home" is as much of a misnomer as a misconception. This is usually used in the context of a homeowner with a large share of home equity that is looking to put money into other investments. But let's call it what it is -- borrowing. That borrowing may indeed lead to wealth creation, but only if the rate of return on the investment exceeds the cost of borrowing. Taking money out of the home is not the same as going to the ATM and taking money out of your checking account. Instead, the homeowner is using the lender's money to generate a return and paying interest for the privilege. This loan is secured by the borrower's asset, home equity.

Bankrate is an excellent site. :-) Check it out!

New Bubble Site: The Bursting Bubble

A new housing bubble site is up and running name The Bursting Bubble. Solid material there. Check it out.

Here are excerpts from an interview I had with Pete Czech, who is the creator of the site.

What is your involvement with the housing market?

First-time buyer looking for a steal.

What prompted you to start the site?

The frustrations of buying a home in an area where prices are making first-time purchases nearly impossible!

What is the purpose of the site?

The purpose is to provide a community specifically related to the bubble and encourage a fair and honest debate with those who believe it and those who don't.

Name some cities that you consider to be bubble markets that are generally under the radar?

Cities like Scranton, PA - outside investors are running up the prices in the area, leaving it more difficult for local investors to compete. Lots of cities like these exist - Boise, ID, some parts of Portland, new Mexico. People who can't afford their area are looking to invest elsewhere and make a buck, driving up the prices substantially when the market really doesn't call for it.

Thanks Pete for the information and welcome to the housing bubble world.

Astute Comments on Greenspan's Policy

On The Housing Bubble 2 Blog, a poster named mike_in_fl writes the following:

What's truly ridiculous is that Greenspan says he can do nothing to recognize or pop building asset bubbles -- and won't really HIKE rates to tame them. But he has absolutely no problem CUTTING rates when stocks plunge (2001), when there's a terrorist attack (later in 2001, when the bond market goes haywire (1995), etc., etc. In essence, he's saying he can accurately spot a bust and deal with it, but not a boom. How come he doesn't just let the busts play out, too, since "Relying on policymakers to perceive when speculative asset [busts] have developed and then to implement timely policies to address successfully these misalignments in asset prices is simply not realistic"

Who's to say the Dow shouldn't fall 500 points? Or tech stocks plunge? Or home prices drop?

Excellent comments. It would be great for Greenspan to answer those questions.

Greenspan: Don't blame Me

In Greenspan's speech today to the National Association for Business Economics Annual Meeting in Chicago he basically was covering his rear.

By the late 1990s, it appeared to us that very aggressive action would have been required to counteract the euphoria that developed in the wake of extraordinary gains in productivity growth spawned by technological change. In short, we would have needed to risk precipitating a significant recession, with unknown consequences. The alternative was to wait for the eventual exhaustion of the forces of boom. We concluded that the latter course was by far the safer. Whether that judgment continues to hold up through time has yet to be determined. .....

Relying on policymakers to perceive when speculative asset bubbles have developed and then to implement timely policies to address successfully these misalignments in asset prices is simply not realistic.

Perhaps. But much more importantly, your policy of lowering short term interest rates to such ridiculous low levels ( 1%), for such a long period of time, was a very significant factor in the 'speculative asset bubble' ( aka housing bubble) that we now face. Greenspan you are not off the hook.

Inventory is Swelling

Inventory is swelling across the bubble markets. The number of days on the market is also climbing.

• "Countywide, active home listings in the Regional MLS, including single-family homes, condominiums and townhomes, have increased a startling 83 percent from August 2004 to September 2005, said veteran realtor Randy Bianchi. Active listings for three-bedroom, two-bath, single-family homes in Palm Beach County have risen 64 percent in the same period, to 2,364 from 1,441, he said" ( Palm Beach Post, 9/27/05)



• "Supply levels rose steadily for a sixth consecutive month in August as active listings for detached single-family homes increased 26.6 percent over the past 12 months, from 29,758 detached homes for sale in August 2004 to 37,666 listings in August 2005." ( Massachusetts association of Realtors)



• "Total housing inventory levels rose 3.5 percent at the end of August to 2.86 million existing homes available for sale, which represents a 4.7-month supply at the current sales pace." (NAR). The 3.5% rise in inventory is just between the end of July to the end of August. That is huge.

The inventory is rapidly climbing. The 'tight inventory' that David Lereah spoke of at the beginning of the month is rapidly ending. The balance is shifting from seller to buyer.

PINELLAS REALTOR ORGANIZATION: No Bubble

The Pinnellas County, Fl Realtors Organization released this report on housing in the Tampa area. They declared that "In fact, the local housing market is in excellent shape with a potential for significant housing equity gains, particularly for homebuyers who plan to remain in their house for the long run."

The Realtors applied various stress tests to the Tampa area market. Here was one such test:

The local housing market will experience a price decline of 5% only under extreme unlikely scenarios. For example, mortgage rates rising to 13.5% in combination with local job losses totaling 66,000 could lead to a price decline.

Could lead to a price decline? Price declines would be a virtual certainty. If those conditions happen price declines would be far greater then 5%. The results of their stress test is complete BS.